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Annual report insights 2021 report.

From surviving to thriving Annual report insights 2021: surveying FTSE reporting
Business leaders and investors recognise that the context in which businesses now operate has been transformed by climate change, nature loss, social unrest around inclusion and working conditions, exacerbated by the global pandemic. The growing awareness of both the relationship between purpose and profit and the expectation that companies deliver sustained value to a range of stakeholders is redefining the social contract between business and society. Boards increasingly recognise that transparency and accountability are essential to enhance trust in the way they are translating their purpose into action. Authentic reporting is key to maintain this trust and to communicate the company’s own story. Explore our report to discover the most recent trends in annual reports.
Explore the report findings We have surveyed 50 companies with more than 500 employees from among the FTSE 350 and across industry groups, examining reporting trends in five areas: purpose, people, planet, prosperity, and of course a fifth "P" that has been greatly affecting business - the pandemic.
Purpose People Planet Prosperity Pandemic


Annual report insights 2021

86% clearly stated their purpose upfront, up from 78% last year
77% of those purpose statements explicitly referred to stakeholders
92% included examples of decision-making in their s172(1) statement
88% described mechanisms used by the board to monitor company culture
Company purpose Purpose should be the driving force behind the company. It explains why the company exists, including financial drivers and broader objectives. Board oversight ensures that company purpose is being fulfilled. An example of how oversight can be achieved would be receiving regular reports from executives on key areas and meeting company employees to hear their views directly about how the company's purpose works in practice. Company strategy should explain how the company intends to deliver on its purpose, while the business model should explain what the company does to achieve its purpose and strategy. Clearly linking the narrative between these sections of the annual report demonstrates how companies are thinking about their purpose in an integrated way. Connectivity can be further demonstrated through identification of meaningful KPIs which are relevant to company purpose and incorporated in policies, including executive remuneration. Insight into how capital is allocated between stakeholders can usefully support the intent or delivery of purpose (see Prosperity chapter). 86% of companies (2020: 78%) gave clear disclosure of their company purpose within the opening pages of the annual report, setting the scene for the rest of the report. A handful of companies mentioned purpose much later in the annual report. One company was in the process of reshaping and rearticulating its purpose and had identified the elements that will feed into the purpose, such as their heritage, values, commitment to sustainability and experiences from the pandemic. Although there is no legal requirement to disclose company purpose, it is difficult for companies to demonstrate how they have applied the Principles of the 2018 Code without clearly articulating it. Disclosing company purpose in a prominent position facilitates the explanation of how that purpose affects its business model and drives strategic choices. HSBC Holdings Plc's report highlighted the link between their purpose and creating long term value for a range of stakeholders - "Being clear about who we are, what we stand for and how this connects to our strategy is an important part of how we align and energise the organisation to create long-term value for all those we work with and for – our investors, customers, employees, suppliers and the communities we serve.“ Principle B of the 2018 Code states: “The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned.” Vodafone Group Plc Annual Report 2021 Vodafone Group Plc gave the reader insight into how they achieved their purpose (“We connect for a better future”) in the year and the link to their three strategic pillars: Inclusion for All, Planet and Digital Society.
Company purpose and broader stakeholders By connecting it to the desired impact on stakeholders, purpose is differentiated from a general aim or mission. Of those companies clearly stating their purpose up-front, 77% (2020: 90%) explicitly referred to stakeholders within that purpose statement, most commonly customers and society at large. A handful of companies referred to the environment, shareholders or employees. Interestingly, the fall in number of companies referring to stakeholders in their purpose statement was in part due to some rearticulating their purpose and removing previous references. Some companies whose purpose did not explicitly identify specific stakeholders, or who referred to society in its broader sense, went on to describe which key stakeholders are encompassed within the intention of their purpose elsewhere in their annual report. Lloyds Banking Group Plc’s purpose, for example, is “Helping Britain Prosper”; its annual report refers to customers, clients, colleagues and communities when describing its aims under its purpose.
It is encouraging to see a stronger correlation between stakeholders defined through purpose and those identified in the business model as groups for whom value is created, up to 88% from only 60% last year. However, this correlation was not reflected through supporting KPIs. Where KPIs had been identified relating to some or all of the stakeholders noted in the company purpose, the KPIs of a handful of companies did not align with their description in the business model of value creation for the relevant stakeholders. Companies should consider whether there is consistency between these two elements to ensure they are measuring and monitoring the appropriate impacts and outcomes of the business. 30% of companies (2020: 40%) disclosing stakeholders within their purpose statement did not disclose any KPIs for them, which raises the question of whether, and how, the board intends to track the company’s impact on, and outcomes relating to, those stakeholders, given the company purpose encompasses them.
The s172(1) statement This was the second reporting season for directors to make a statement setting out how they had regarded those matters identified in s172(1) (see graph) while performing their duty to promote the success of the company for the benefits of its members as a whole. Company stakeholders are a central focus of the s172(1) statement. However they are not the sole focus; other matters intended to be covered by the s172(1) statement provide an opportunity for the company to describe how they are leading a responsible, long-term business whilst fulfilling their purpose and generating profit. Clarity of discussion of most matters was broadly consistent with or had improved on last year. In particular it was pleasing to see an increase in boards describing their consideration of the impact their company has on the environment and articulating how they have considered the likely consequence of decisions in the long term. While there was a notable improvement in boards articulating how they had regarded the need to act fairly between different shareholder groups and interests, there remains scope for improvement in this area. In addition, in some cases cross-references used by companies to incorporate certain matters required by s172 were not sufficiently precise or complete, meaning there was useful information elsewhere in the annual report that simply had not been brought into the scope of the statement. This occurred, for example, where cross-references were to the whole of the strategic report or to long sections elsewhere in the annual report. The Financial Reporting Council’s (FRC) top tips on s172(1) statements look for cross-references to be specific and clear, supporting the disclosures made within the s172(1) statement. The scope of the s172(1) statement was also unclear in those cases where reports included separate sections on stakeholder engagement immediately before or after the s172(1) statement heading, with no obvious cross-references from the s172(1) statement. This might also explain the outcomes shown in the graph. The better stakeholder disclosures articulated why certain stakeholders are important to the company and how the outcome of engagement with those stakeholders might influence development and implementation of strategy and decisions made, such as Serco Group Plc. How many companies clearly discussed each of the matters set out in s172 as part of their s172(1) statement? While some companies included useful descriptions of management’s engagement with stakeholders and their role in implementing company strategy, it was not always clear how the board itself had oversight of this engagement and the information obtained in order to fulfil their responsibilities under s172(1). The most useful s172(1) statements included examples of significant decisions made during the year, giving insight into how the company has balanced the needs of different stakeholders in the short term while considering the impact on longer term resilience and sustainability of the company. The FRC’s Financial Reporting Lab (the Lab) has found that investors are seeking better information on how companies consider their stakeholders while making decisions that are contributing to company purpose, strategy and long-term success. 92% (2020: 84%) of companies included examples of decision-making during the period. Decisions included those which were routine in nature (such as dividend approval) and those which were non-routine (such as restructuring or divestments), with the majority of companies including a combination of the two. The FRC notes that routine decisions will likely not involve difficult stakeholder trade-offs. We were therefore pleased to see that only 4% of those disclosing examples of board decisions had chosen to describe what we considered to be only routine decisions. Understanding how difficult stakeholder trade-offs are considered for non-routine decisions is informative and helpful in considering how a company is fulfilling its purpose. EVRAZ Plc, for example, clearly detailed how they considered the impact of construction of a new rail plant (a non-routine decision) on their different stakeholders. Perhaps unsurprisingly, 87% described key decisions made in response to COVID-19, while only 26% explained decisions relating to climate change, primarily approval of targets and strategies to achieve them. The FRC has commented on the lack of companies reporting on engagement with suppliers in particular, and the importance of suppliers as a source of risk. Any failures or issues within the supply-chain can impact the success of the company, even if only in the short term. The importance of these supply-chain relationships has come to light for many companies whilst coping with the impact of the COVID-19 pandemic. The FRC review of Corporate Governance Reporting (2020) recommends that boards should review their prompt payment policies on a regular basis and have mechanisms in place for being alerted to problems with payment expectations. Disappointingly, only 32% disclosed clearly how the board has monitored supplier payment practices. Many companies do not refer to payment as a matter on which they engage with suppliers in their s172(1) statement. Serco Group plc Annual Report 2021 Serco Group plc articulated in their s172(1) statement why certain stakeholders are important to the company and how the outcome of engagement with those stakeholders has influenced Board discussions and principal decisions made. Evraz Annual report & accounts 2020 EVRAZ Plc clearly detailed how they considered the impact of construction of a new rail plant (a non-routine decision) on their different stakeholders. Provident Financial plc Annual Report and Financial Statements 2020 Examples of responses to COVID-19 were used by Provident Financial Plc to illustrate how feedback from stakeholder engagement influenced key decisions made by the board (see Pandemic). Examples of board decision-making also assist in demonstrating the fulfilment of company purpose. Lloyds Banking Group Plc Annual Report and Accounts 2020 Lloyds Banking Group Plc described a board decision in the s172(1) statement which clearly gave regard to their purpose “Helping Britain Prosper” and strategy. Centrica plc Annual Report and Accounts 2020 As well as providing examples of stakeholder engagement and key decisions made by the board, Centrica Plc described the impact of such decisions on risk, demonstrating their s172(1) duty to promote the success of the company.
Company culture Company purpose manifests itself in the company DNA, infusing throughout and aligning culture, values and behaviour. Purpose and culture together establish the company’s commitment to doing business profitably yet in an ethical, reputable and responsible manner, with purpose driving strategy and organisational culture acting as a key input into decision-making. The 2018 version of the UK Corporate Governance Code (the 2018 Code) requires the board to act with integrity, lead by example and promote the desired culture. The FRC has noted that work is required in respect of boards monitoring company culture, holding leadership to account for ensuring that culture aligns with company purpose and values, investigating where there are gaps and taking action to address them. 88% (2020: 90%) of companies described mechanisms used to monitor company culture. 70% identified employee engagement surveys and 36% mentioned site visits by a board member (or an alternative arrangement in replacement of a site visit due to the pandemic, or both) as tools used by the board to understand and monitor views on company culture. National Express Group Plc usefully presented their culture framework and the Board methods of monitoring culture. Other companies demonstrated alignment between purpose and culture, such as Synthomer Plc, which clearly set out how the board monitors culture and how it links to their wider strategy and purpose. They used a table to explain what the board looked for when monitoring culture, such as integrity and openness. It indicates whether such behaviours were evidenced through the cultural identifiers across the business, which encompass engagement with wider stakeholders (including employees, suppliers and the environment). National Express Annual Report 2020 National Express Group Plc usefully presented their culture framework and the Board methods of monitoring culture. Synthomer plc Annual Report 2020 Synthomer Plc clearly set out how the board monitors culture and how it links to their wider strategy and purpose.
What to do: Given the global trajectory towards mandatory ESG reporting, enhance business capacity to measure, manage and report on ESG matters and consider how these capabilities will be embedded across all aspects of the business, particularly regarding governance, strategy, risks and opportunities, and metrics and targets. Identify stakeholders relevant to company purpose and describe how value is created for them through the business model and strategy. Use KPIs to monitor the company’s impact on, and outcomes relating to, those stakeholders. Demonstrate clearly how the board exercises oversight of engagement with stakeholders and how the feedback obtained reached the board and was used by the board in its decision-making and fulfilment of its s172(1) duty. Insight into how the board has considered difficult stakeholder trade-offs and the risks and opportunities that could affect the company’s relationships with stakeholders when making decisions can help readers to understand how a company is pursuing its purpose. What to watch out for: Set out your company’s purpose clearly and prominently. Demonstrate the link between the business model and strategy disclosures. Does the report evidence how purpose has taken into account people, planet and prosperity during the period? Is there explanation of how culture aligns with purpose, values and behaviours? Is there disclosure of how the board exercises oversight over company purpose and monitors company culture? Where cross-references to other sections of the annual report are used within the s172(1) statement, are these clear and specific, rather than referring to long sections of the strategic report? More precise use of cross-references will ensure a complete, informative and authentic s172(1) disclosure. Consider using case studies in the s172(1) statement which help demonstrate how the board has made significant decisions during the year and how it has balanced the needs of different stakeholders through its decision-making. Consider whether suppliers should be viewed as key stakeholders and if so, disclose how the board oversees payment practices.
Explore the report findings We have surveyed 50 companies with more than 500 employees from among the FTSE 350 and across industry groups, examining reporting trends in five areas: purpose, people, planet, prosperity, and of course a fifth "P" that has been greatly affecting business - the pandemic.
Purpose People Planet Prosperity Pandemic


Annual report insights 2021

84% described actions taken throughout the business to improve diversity, but only 44% did the same in respect of board diversity
70% of FTSE 100 companies disclosed board-level ethnicity and met the recommendations of the Parker review to have one ethnically diverse board member by 2021
While 84% had a principal risk relating to staff turnover or attrition, only 12% disclosed a related KPI
15 companies provided a target for the employee-related KPIs and nearly all of these demonstrated board oversight over those targets
98% had a clear workforce engagement mechanism in place
Employees and connectivity within the annual report It has become increasingly common to read positive statements in annual reports about the importance of employees to the company. Employees are often described as a company’s “greatest asset” or “at the heart of everything we do”. The COVID-19 pandemic and other significant societal issues, such as the urgent need to address racial injustice, have served to sharpen further investor and stakeholder focus on the way in which companies have engaged with and supported their employees and how they address urgent societal issues. It is important that discussion of employees throughout the annual report is consistent and tells an authentic, connected story. Just four companies in our survey made explicit reference to employees in their purpose (see Purpose). Despite this, 33 of the 35 companies which set out in their business model the key inputs or resources which drive value creation referred to employees or the broader workforce as one such key input or resource. “Organizations are expected to embrace human rights, by fostering diverse, inclusive workplaces with equal pay for work of equal value and by offering all those with a stake in the firm’s value creation the opportunity to thrive and grow.” WEF IBC White Paper on measuring stakeholder capitalism Where in the annual report were employees considered? Most businesses recognise that employees are not only a resource generating value but also an important stakeholder and therefore seek to demonstrate how business creates value for them. This is evident from the high percentage of companies (98%) discussing how the board has regarded employees in the s172(1) statement. Despite this, while most companies described the value that they create for their employees, only a few set out financial metrics to describe that value. These typically referred to wages or other employee benefits paid, continuing to reinforce the view that, for some companies, having a job and being paid for it is considered sufficient value creation for their employees. Quantification in non-financial terms typically referred to employee engagement, with some referring to the amount of training received in the year. Where a narrative description of value creation was given, often this was relatively uninformative in nature, stating that employees receive “interesting and rewarding careers” or “a safe working environment”. More detailed and specific descriptions, including reference to actual value created for employees in the year, would lend authenticity to broader statements about the importance of employees made elsewhere in the annual report. Such descriptions could also link through to the s172(1) statement and consideration of capital allocation. Of the 18% of companies that discussed capital allocation in the context of employees, this discussion typically addressed capital allocated to payment of salaries, benefits and training (see Prosperity). Given the impact of the pandemic and the fact that 96% of companies discussed employee wellbeing, it was surprising that these articulations of value did not encompass wellbeing more explicitly. Are employees considered to be a key resource in the business model? What form does the discussion of value creation for employees in the business model take? KPIs play a critical role in enabling businesses to assess and monitor value created both by and for employees. As shown in the graph, KPIs most commonly addressed health and safety. Only 15 companies provided a target for the employee-related KPIs, though pleasingly, nearly all of these also explained how the board monitors progress against those targets, demonstrating clear board oversight. KPIs can also offer clarity as to how principal risks are monitored and it is generally increasingly common to see principal risks linked to particular metrics. This linkage represents an opportunity to present a more connected, consistent ‘story’ when it comes to the importance of employees to the business but is often missed. For instance, although 84% identified a principal risk relating to attracting and retaining talented employees, just four of these presented a KPI in this respect.
What types of employee-related KPIs were reported?
Which types of employee-related principal risks are reported?
Workforce engagement Understanding and taking into account the needs and concerns of the workforce is key to driving appropriate board-level decision-making. In the last year, amid the COVID-19 pandemic and other societal challenges, many businesses have had to make significant and lasting changes concerning the workforce. Some were positive changes such as increasing the focus on recruitment of ethnically diverse employees and driving new ways of working in recognition of the increased demand for agile working. In other cases, restructuring and closure of parts of the business (whether due to COVID-19 or other pressures) adversely impacted the workforce. Companies should explain the effect of strategic and business model changes on the workforce and demonstrate how the board has considered the interests of the workforce when making such changes. The 2018 Code requires companies to put in place one or more methods of engaging with the workforce, setting out three proposed methods. If companies implement alternative arrangements, they should provide an explanation of the arrangements and why they consider them to be effective. Boards are also required to explain how they have had regard to employees in their s172(1) statement, including the impact that employee feedback has had on decisions made during the year. Effective workforce engagement has been particularly critical during the COVID-19 pandemic (see Pandemic). The FRC expects clear disclosure of how companies engage with their workforce and why their method of workforce engagement is effective - companies should explain how workforce engagement works for them and how the board knows it is effective. How did boards engage with the workforce? All but one of the companies in our survey set out a clearly described workforce engagement mechanism. Alternative mechanisms typically involved a range of engagement methods such as ‘town halls’, board/employee listening sessions and pulse surveys rather than one specific approach. Seven of the nine companies with an alternative mechanism clearly discussed the effectiveness of their alternative mechanism. In many cases, in line with FRC expectations, companies using methods set out in the 2018 Code also included an assessment of effectiveness, with better examples demonstrating evidence of consideration at board level and describing actions taken to improve effectiveness. 76% of companies set out what the board understood workforce concerns to be, with two thirds of these also clearly describing activities that were either planned or already in place to help address those concerns. However, only 44% of all companies made it clear how feedback from employees had influenced board decisions made during the year. This ties back to the discussion above regarding the importance of a consistent message on the value of employees to the business. “Companies should disclose clearly how workforce engagement works for them and how the board knows it is effective”
Pearson plc Annual Report 2021 Pearson plc, in its corporate governance statement, stated that a review of the effectiveness of its employee engagement network (EEN) had been carried out and described actions taken as a result. Essentra Annual Report 2020 Essentra plc included a Q&A with the designated workforce NED to explain the way in which its chosen engagement mechanism works and discussed the effectiveness of that mechanism. National Express Group PLC Annual Report 2020 National Express Group PLC explained the alternative arrangements for workforce engagement they have adopted along with the involvement of the board and presented a summary of workforce feedback on the themes which emerged from the engagement activity.
Diversity and inclusion - the workforce In the last year the focus on social justice and the need to address historical inequality has increased significantly. Investors, regulators and society as a whole increasingly expect companies not only to provide information about their diversity and inclusion position and policies but to take a proactive approach to increasing accountability by setting clear targets and putting plans in place to ensure that they are achieved. More detail is available in our diversity and inclusion article in On the board agenda 2021. The 2018 Code requires companies to disclose how the policy on diversity and inclusion links to company strategy, so boards should be considering diversity and inclusion at a strategic level and implementing policies and practices accordingly. Diversity and inclusion should also be addressed in the annual report both at board and employee level. Companies should describe how these issues form part of their overall strategic priorities and explain how this is supported by the company’s values and culture. 84% of companies set out actions taken to increase diversity in the year and the majority went beyond a discussion of gender to cover other areas such as ethnicity and LGBTQ+. These activities largely related to the establishment of employee focus and support groups, leadership training and other HR activities. It was unusual to see a clear and meaningful link to strategy and was most common instead to see a generic statement acknowledging that “increased diversity and inclusion links to business performance”, or that “diverse talent is essential to achieve our strategic objectives”. “The FRC expects to see all companies promoting and recruiting on merit. Those who use [meritocracy] as a justification for not actively pursuing diversity policies should demonstrate how their approach brings about diversity in the boardroom and workforce.” “Review of corporate governance reporting”, FRC, November 2020 Did the company disclose actions taken to increase diversity in the year? Did the company disclose actions taken to increase board-level diversity in the year?
Pearson plc Annual Report 2021 Pearson plc set a broad target for diversity, equity and inclusion during 2020 and explained that this was in response to the increased global awareness of the importance of and need for social justice. It also set out a clear policy and plan to improve its diversity equity and inclusion (DE&I) in future. Savills plc Annual Report & Accounts 2020 Savills plc set out a clear explanation of why diversity is important to its strategy, going beyond gender, and explains its objectives, implementation methods and progress in the year. Rotork plc Annual Report 2020 Rotork plc provided detailed analysis of various diversity metrics and discussed targets for some of these, as well as explaining that it has undertaken its first global survey of ethnicity and disability in 2020.
Diversity and inclusion – the board An update to the Parker Review, published in 2020, expressed concern that insignificant progress was being made against these recommendations and noted that “to date, there has been little evidence of action beyond that acknowledgement – simply put, there is inertia.” The update goes on to call upon stakeholders to take the necessary steps to drive forward adoption of the recommendations. For example, Legal and General Investment Management (LGIM), in its ethnic diversity stewardship plan, has set out emerging best practices that it wants to see. Although the Hampton-Alexander Review on gender diversity has now completed without a direct successor, the Financial Conduct Authority is now consulting on a new listing rule to require companies to comply or explain against a target of 40% of women on boards, at least one senior female director and at least one ethnically diverse director. “I want to see boards invest time and energy in making diverse appointments not to achieve a target but because it will have a positive impact on their business…I am pleased that this research supported the need for companies to set clear targets and report against them as a means to improving diversity. Many companies only set targets for gender or to a lesser degree ethnic diversity.” Sir Jonathan Thompson, CEO of the FRC, Board Diversity and Effectiveness in FTSE 350 Companies The graph shows that only 20 companies (representing 40% of our sample) have now met the Parker target of one ethnically diverse director and have disclosed the ethnic diversity of the board. 14 of these were in the FTSE 100. A further 18% disclosed plans of varying clarity and quality. This still leaves 42% which neither disclosed ethnicity nor set out how, when or if the Parker Review targets would be met. None of the companies in our sample disclosed ambitions to go further than the Parker Review targets. Perhaps more worrying still is the lack of disclosure about specific activities undertaken by the board during the year to develop boardroom diversity. Although the majority of companies explained actions taken to improve workforce diversity, 56% failed to discuss any diversity-related actions at board level during the year at all. A further 18% only discussed actions taken at board level in relation to gender diversity. Where board-level activities were discussed, directors tended to describe changes being made to the candidate selection process to increase diversity. Although corporate governance statements typically set out board-level diversity and inclusion policies, these tended to be very generic in nature; it is important that boards demonstrate how they are “living” and acting on those policies. Achieving targets, while positive, is not an “end goal” and it is essential that boards consider the extent to which board composition reflects the communities in which they operate. In doing so they should: report transparently on their position and plans; explain what has been done in the year and actions planned for the future; demonstrate continued drive to improve diversity and inclusion; and avoid the appearance of complacency by suggesting that because a target has been met, no more needs to be done. How are boards meeting the Parker recommendations? Did the company disclose actions taken to increase board-level diversity in the year?
Pearson plc Annual Report 2021 Pearson plc described its board diversity objectives and set out actions taken in the year against each. BT Group plc Annual Report 2021 BT Group plc stated that during the search for a new chairman, the recruitment consultancy firm was specifically requested to ensure that the longlist comprised a diverse range of candidates.
What to do: Review the authenticity, balance and completeness of your reporting. If employees are considered core to the business, is this reflected in a connected and consistent manner throughout your annual report? Explain how your board considers diversity and inclusion, including in the boardroom. Check which KPIs measure outcomes and dependencies in respect of employees and establish board level governance oversight over these. Be transparent in your reporting of targets set, including any link to management remuneration. What to watch out for: Consider how the various employee-related disclosures in the annual report link together, including consideration of employees as a key resource and a key stakeholder for whom value is created. Are these disclosures linked to the disclosures of relevant principal risks and KPIs used to measure performance? Diversity and inclusion is high on the investor, government and regulator priority lists; is it part of the company’s strategic priorities and are the metrics and targets used for accountability disclosed? Is there discussion of decisions as part of the s172(1) statement – to demonstrate and support the effectiveness of employee engagement during the year? Does the corporate governance statement clearly address specific activities carried out by the board to increase boardroom diversity during the year and is detail included on how any particular targets are expected to be met?
Explore the report findings We have surveyed 50 companies with more than 500 employees from among the FTSE 350 and across industry groups, examining reporting trends in five areas: purpose, people, planet, prosperity, and of course a fifth "P" that has been greatly affecting business - the pandemic.
Purpose People Planet Prosperity Pandemic


Annual report insights 2021

All companies mentioned climate change with 84% disclosing clear board oversight over climate change, up from 62% last year
8% stated compliance with the TCFD recommendations, with a further 74% having clear plans to comply in the near term
28% identified climate change as a standalone principal risk – up from 22% last year – with a further 46% (2020: 44%) identifying climate change as part of a broader principal risk or an emerging risk
82% had targets linked to climate change, but less than half of these discussed any business changes in light of climate change risk
Although 30% referred to climate change in their financial statements (up from 4% last year), many of these disclosures lacked detail
Only 72% clearly complied with all aspects of the SECR disclosures
TCFD – Comply or explain? It was encouraging to see that every report surveyed had some mention of climate change. Although only 8% of companies stated compliance with the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations, many companies were already complying with some of them and most had plans to comply in upcoming reporting seasons. The Financial Conduct Authority (FCA)’s new listing rule, effective for accounting periods beginning on or after 1 January 2021, requires UK and overseas commercial companies with a premium listing to make disclosures consistent with the TCFD recommendations or explain why they have not done so. In line with TCFD’s final report, the FCA has confirmed that disclosures consistent with the TCFD’s governance and risk management recommendations should be made irrespective of a materiality assessment, whereas “in-scope companies should consider whether disclosures under the strategy and metrics and targets recommendation meet the materiality threshold”. Preparers should be cognisant of the significant time and effort in getting ready to report in line with the TCFD recommendations, including performing necessary gap analyses, embedding climate considerations into an organisation and developing a timeframe and actions. With the FCA’s requirements effective in the coming reporting season, preparers that have not yet established appropriate reporting capabilities should act with urgency to develop them. For more information on the FCA’s new listing rule see Deloitte’s Need to Know publication. TCFD: Are companies ready to "comply or explain"? Most companies making TCFD disclosures did so fully within the annual report, with a minority electing to cross-refer to other publications. Those in scope of the FCA’s new listing rule will be required to make these disclosures within their annual report, or to explain why they have disclosed these elsewhere. While there is no set format for the disclosures, many companies presented a separate section that addressed each of the four pillars of TCFD, either within the strategic report or towards the end of the annual report. For those companies who were not ready to comply with all eleven recommended disclosures, this section tended to be standalone. Others who were more advanced with their analysis and understanding of climate change risk often used the TCFD section as a signpost to where information had been integrated within the rest of the report. Where were TCFD disclosures made? Drax Group plc Annual report and accounts 2020 Drax Group plc’s TCFD disclosure signposts the four pillars, with progress against each pillar detailed and cross-referring to information integrated within the wider report.
Governance The first pillar of TCFD should be a coherent narrative describing the board’s and leadership’s oversight and management of climate-related risks and opportunities. It was encouraging to see clear improvement year on year in disclosure of oversight of climate change at a board level. Of the 37 (2020: 33) companies that had identified climate change as a principal or emerging risk, 20 (2020: 13) went on to indicate that the board or a board committee considers climate-related issues specifically when making key decisions – a marked growth from last year. A quarter of companies clearly referred to climate change in the examples of decisions made during the period as part of their s172(1) statement - less than might be expected when considering the regulator and investor focus and that section 172(1) requires that directors have regard to the “impact of the Company’s operations on the community and environment”. These decisions were usually in relation to approvals of climate-focused strategies and initiatives, but it was uncommon to see separate operational decisions described where climate change had been a key consideration. Meggitt PLC Annual Report & Accounts 2020 Meggitt PLC gave an informative top-down summary of the responsibilities in relation to climate change from Board level to management working group.
Strategy Strategy is the second pillar of TCFD focused on the description of how the board intends to address the climate risk identified and over what period. Clear and balanced description of climate commitments made and how these commitments and associated targets have been incorporated into business strategy and plans is critical to understanding financial impacts of climate change risks and opportunities on a business, i.e. its resilience and ability to generate value over short, medium and long term. 16% had described the resilience of the company’s strategy in the context of climate change, mirroring the TCFD finding that few companies are disclosing resilience... ...while 28% had used climate-related scenarios to inform their strategic and financial planning. One of TCFD’s key recommended disclosures focuses on the resilience of an organisation’s strategy, taking into consideration different climate-related scenarios, including a 2° Celsius or lower scenario. This area of analysis can be challenging and TCFD, in recognition of this, has issued guidance that preparers may find helpful: The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities. Encouragingly, 52% clearly explained their strategy for achieving climate-related targets... ...with 12% acknowledging some or all of the financial cost of implementing that strategy. New proposed guidance from TCFD includes a focus on disclosing capital allocated towards climate risks and opportunities. Stakeholders might doubt the authenticity of ambitious climate targets that are not matched by equally ambitious capital allocation policies. 38% discussed changes to the business model or to the broader group strategy as a result of responding to the climate change risk identified. These ranged from plans to cease more carbon-intensive activities, to substantive integration of environmental factors into investment and procurement criteria, to investing in low carbon fleets. 82% of companies had targets relating to climate change, however less than half of these particular companies had discussion of any business changes in light of climate change risk. But only 14% of companies utilised the same target for directors’ remuneration as is used to monitor progress against climate strategy. Other companies had either not linked any remuneration targets to environmental matters at all (54%) or else had not provided sufficient granularity to determine whether such targets aligned with any climate metrics disclosed. For more detail around the importance of building credible climate commitments and how to close the trust gap in this area, see Deloitte’s thought piece Building credible climate commitments: a roadmap to earning stakeholder trust. TCFD, in its implementation guidance, encourages organisations to describe whether and how metrics are incorporated into remuneration policies; in its Proposed Guidance on Climate-related Metrics, Targets, and Transition Plans, it includes the “amount of senior management remuneration impacted by climate considerations” as a recommended metric for all sectors. With ever-growing scrutiny from investors, NGOs and wider stakeholders, companies should avoid potential greenwashing by ensuring that communications convey authentic, transparent and consistent messaging.
Risk Management The third pillar of the TCFD recommendations calls for an overview of the risk management process over climate change related risks. Risk reporting is not a new area for quoted companies in the UK who are already required to explain how they identify and manage risk and to disclose their principal risks. A growing number of companies identified climate change as a principal risk, with only 36% (2020: 46%) not clearly articulating whether climate change risk was considered as part of the principal risks they identified. 42% identified climate change as an emerging risk, which included a few companies identifying certain aspects of climate change risk as principal and other aspects as emerging. Some reporters had articulated climate related risk in their TCFD disclosures yet failed to explain whether it was considered to be a principal risk, part of a principal risk or an emerging risk. The better reporters made clear how the risk was being managed and mitigated. This included demonstrating clear linkage between the risks identified, business and strategy changes, and targets and metrics used in order to monitor the identified risks. Of those companies identifying the environment as a key resource or input in their business model, all had classified climate-related risk as being either a principal or emerging risk. Is climate change identified as a principal risk? The categorisation of climate-related risks (where described) as being physical, transitional or both, was broadly in line with last year. Many companies still struggled to articulate the impact of the risk identified on the business model and how it related to their business specifically. Few companies described the risk in a way that allowed for the potential financial impact to be clearly understood. General descriptions citing potential “extreme weather patterns” or “business interruptions in our supply chain” without providing clarity around specific locations or assets that might be impacted were too vague to provide meaningful insight. The Financial Reporting Council (FRC) is looking for companies to provide segmental and disaggregated revenue disclosures to indicate the relative sizes of operations for which climate change presents substantially different risks and opportunities. Disappointingly only three companies provided these disclosures in a meaningful way. Without such granularity and specificity of disclosure, it is difficult for the users to understand the business or financial impacts of the climate-related risks. The TCFD recommendations specifically refer to “risks and opportunities”, yet it was rare to see companies meaningfully describing opportunities with relation to climate change. More mature climate-related disclosures included clearer discussion of opportunities in relation to climate change. Meggitt PLC Annual Report & Accounts 2020 Meggitt PLC presented a table that detailed the opportunities and risks in the short, medium and long terms (clearly defining these time frames – something disclosed by only 8% of our sample). This table details the risks and opportunities by aerospace, energy and production, aligning with the segmental disclosures in the financial statements. This facilitates the user’s understanding of the relative sizes of operations facing substantially different risks and opportunities. Is climate change risk predominantly a physical risk for the organisation, a transition risk or a combination of the two?
Metrics and targets The fourth pillar of the TCFD recommendations requires companies to identify those metrics and targets used to assess and manage relevant climate-related risks and opportunities. 46% identified a KPI linked to climate change. Most of these were based on carbon emissions, with two banks measuring sustainable or green financing metrics alongside metrics measuring their own emissions. Other metrics linked to climate change, although not identified as a KPI, were most often related either to consumption of energy or water or else to waste and recycling. Where companies included a climate-related metric, the relevance and materiality of the metric to the company and its business model was usually clear. In a minority of instances, however, this was not the case. Lack of explanation of relevance and materiality runs the risk of confusing the users of this information. 32% of companies disclosed how the board monitors climate-related goals and targets. Fundamental to determining the success of a company’s progress against a strategy is the identification of targets, measurement of supporting metrics, and board oversight of progress against these. Over 70% of those companies that had identified climate change as a standalone principal risk had also identified a KPI related to climate change, indicating that the risk was being monitored via a relevant metric. KPIs are frequently interpreted by stakeholders to be indicative of management and board focus. Are climate-related metrics disclosed? Of those 35 companies disclosing a target for GHG emissions reduction, 15 included some or all of their scope 3 emissions within that target. Incorporating scope 3 emissions within targets ensures that such emissions are being managed, given they often form the majority of an organisation’s total emissions (see SECR disclosures, below). The FRC has called out the lack of clarity in reports of how progress towards goals will be assured. It was therefore encouraging to see almost half of the companies with climate-related targets were already obtaining either internal or external assurance over the metrics used to monitor progress against those targets. 63% of companies that set emissions targets clearly defined these. While many more companies now highlight a “Net Zero” or “Carbon Negative” target, few define these effectively. The FRC has highlighted the need for clear definitions of what it means to be net zero or Paris compliant in a company’s specific circumstances in order to avoid confusion and potential greenwashing. Are climate-related targets disclosed? Yes No No such targets
SECR disclosures The Streamlined Energy and Carbon Reporting (SECR) disclosures are designed to enhance existing disclosures of GHG emissions and were new requirements for most companies in our sample. The FRC focused on SECR disclosures as part of their ongoing programme of work on climate change. Companies generally applied the new requirements of SECR well, with 72% appearing to be fully compliant. In several cases, companies had not discussed measures taken to improve energy efficiency in the year and it was therefore unclear whether they were fully compliant with SECR. Some companies helpfully gave a negative statement explaining that they had been unable to take such measures, often due to COVID-19. For example, The Unite Group PLC explained that they could not improve energy efficiency this year due to COVID-19 restrictions and an acquisition with locked-in terms. In some cases, companies may not have provided detail on the UK proportion of the required emissions and energy consumption disclosures on the basis of these being nil; however in such instances the annual report should state that there were no UK and offshore emissions. Disclosure of Scope 3 emissions is not a legal requirement for quoted entities, although TCFD and various investor bodies are calling for full disclosure of organisations’ footprints, including Scope 3 where material. Preparers should also note that TCFD’s new guidance calls for Scope 3 where it is more than 40% of total emissions. Scope 3 emissions may arise from a wide variety of sources: with 15 categories of emission that are encompassed by this Scope, unambiguous and clear explanation of which emissions a company is disclosing is vital. For more information on SECR see Deloitte’s publication A Closer Look - Streamlined energy and carbon reporting. BT Group plc Annual Report 2021 BT Group plc included in its annual report Scope 3 worldwide emissions and a description of which emissions were included within Scope 3. This example gave particular clarity by disaggregating the sources for each scope of emissions.
Financial statements A key focus of the FRC this reporting season was to encourage companies to explain the financial impact of climate-related risks, commitments and strategies on the financial statements including: impairment of individual assets as well as cash generating units; useful economic lives of assets; expected amounts and timing of cash outflows for provisions and other liabilities; fair values of assets and liabilities; and disclosure of key accounting judgements, estimation uncertainties and related sensitivities. While it was encouraging to see an increase in the number of companies referring to climate change in the financial statements, many of these were brief references, unsupported by any detail of the impact on the numbers. For example, a brief reference to the consideration of “principal risks, including climate change” as part of impairment disclosures offered little insight into how climate risk and company strategies affected projected future cash flows or the discount rate used. It was disappointing to note that half of those companies describing climate change as a principal risk did not reference it in the financial statements. The most common references to climate change in the financial statements were with respect to impairment disclosures, in accounting policies, and in relation to critical judgements and key sources of estimation uncertainty. In some cases, the accounting policies asserted that the impact of climate change had been incorporated into cash flow assumptions for going concern and impairment assessments either without further supporting detail or else simply confirming it had no material impact. The better disclosures implied connectivity with the strategic ambitions described elsewhere in the annual report by indicating that cash flow assumptions were aligned to the business plan and sustainability strategy. It was noteworthy that most companies referring to climate change within their impairment disclosures did not identify climate change to be a key source of estimation uncertainty which may result in a material adjustment in the next financial year. The FRC specifically called out in its climate thematic examples of estimates which might be key sources of estimation uncertainty, stating that it expects companies to disclose sensitivity analyses where an estimate meets the criteria of IAS 1:125. 8% of audit reports referred to climate change. The role of the statutory auditor should not be understated: the FRC has stated that auditors need to do more to test and challenge the board and management on their consideration of the financial implications of climate change. Investors are clear that climate related risks are material to businesses in all sectors and expect companies to account for and disclose them appropriately in annual reports and financial statements. Auditors have an important role to play in assessing this by integrating consideration of climate related risks into the audit process. For more information on climate change and the potential impacts upon accounting see Deloitte’s Closer Look publication. Where is climate change referred to in the financial statements? Weir Group PLC Annual Report and Financial Statements 2020 The Weir Group PLC’s impairment disclosure in the financial statements demonstrated connectivity with the strategic report by referencing the business plans responding to the long-term sustainability goals, implying alignment between different functions of the business and authenticity of the targets. Tesco PLC Annual Report and Financial Statements 2021 Tesco PLC acknowledged in their financial statements that their value in use calculations used in their impairment reviews incorporate climate change scenarios consistent with those described in their viability statement. Centrica plc Annual Report and Accounts 2020 Centrica plc provided details in its financial statements of the sensitivity analysis performed in relation to the value in use calculations to test for impairment of goodwill. Inchcape plc Annual Report and Accounts 2020 Inchcape plc included in its financial statements an overview of the sensitivity analysis performed taking the potential impact of climate change on the value in use model (in relation to the impairment of goodwill and distribution agreements) and disclosed the monetary value of that analysis.
What to do: Demonstrate clear oversight of and engagement with the process of developing TCFD disclosures, particularly as they are now mandatory for premium listed issuers. As wider environmental issues such as biodiversity, deforestation and use of water attract a growing focus, climate-related disclosures (whether mandated or not) are increasingly expected by investors and other stakeholders as a norm for all businesses. Be transparent about the strategies set to meet environmental targets and commitments, and the definition of those targets and commitments, to avoid facing accusations of potential greenwashing. Disclose clearly the impact of climate risks and climate commitments made on judgements and estimates in the financial statements; ensure that the message told in the financial statements is consistent with that in the strategic report. What to watch out for: Investors and the FRC expect companies to explain clearly the financial implications of climate change risks and opportunities and their impact on the companies’ strategic choices and business plans, both in the narrative of the annual report, and in the financial statements. Is this disclosure sufficiently specific and granular to be decision-useful? Is the message consistent between the front and back halves of the report? Specific and granular disclosures should also be provided when disclosing Scope 3 emissions to provide an understanding of which out of 15 generally recognised categories of emissions are included in their metrics and targets. Scenario analysis was frequently identified by companies themselves as needing further development. Given the complexity associated with these scenario analyses, and the FCA’s requirement for premium listed companies to provide, on a comply or explain basis, TCFD aligned disclosure from the coming reporting season, preparers should urgently perform a gap analysis. The TCFD technical supplement The Use of Scenario Analysis in Disclosure of Climate-Related Risks and Opportunities provides useful guidance– refer to the TCFD website. Users of reports expect clarity not only around the level of climate ambition, but also around baselines for future targets, how progress against these targets will be monitored and governed, and the level of assurance sought over the related metrics – refer to Corporate climate change commitments and trust | Deloitte Insights for more on this. Requirements for Streamlined Energy and Carbon Reporting disclosures are complex and wide-ranging – there is some way to go for many to achieve full compliance.
Explore the report findings We have surveyed 50 companies with more than 500 employees from among the FTSE 350 and across industry groups, examining reporting trends in five areas: purpose, people, planet, prosperity, and of course a fifth "P" that has been greatly affecting business - the pandemic.
Purpose People Planet Prosperity Pandemic


Annual report insights 2021

84% discussed resilience or sustainability of the business model
88% articulated in their business model value created for stakeholders, with 32% quantifying some or all of that value
Only 38% presented one fully integrated strategy including broader stakeholders
80% provided an insight into capital allocation
76% disclosed or described a dividend policy
80% incorporated ESG factors into directors’ variable remuneration, with 46% including environmental considerations (up from 24% last year)
Creating value to drive prosperity “Prosperity” captures the idea of a business’s broader contribution to society, beyond financial profit. This includes considerations such as distribution of value including employment and wealth generation, innovation of products and services that solve society’s problems and social value. The high expectations of business to address and solve today’s challenges bring new demands upon those charged with governance to focus on societal engagement with the same rigour, thoughtfulness, and energy used to deliver on profits. And there is evidence that these efforts are recognised. As reflected in the Edelman barometer 2021, business is the most trusted institution, with a 61% trust level globally. Many companies recognise the importance of maintaining and enhancing their social license to operate, and creating value to stakeholders beyond shareholders. “Businesses have impacts on, and benefit from, economic and social prosperity in myriad ways and it is widely recognized that businesses cannot succeed in a failing society. Furthermore, a company’s value is increasingly reflected in the off-balance sheet intangible assets and value drivers associated with economic and social prosperity” The World Economic Forum’s IBC report on Measuring Stakeholder Capitalism The fifty companies in our sample reported that they had: generated over £340bn revenue, ... ...provided employment to over 1.5 million employees, paying them £65bn in wages and salaries, ... ...received £1.66bn in COVID-19 government assistance, repaying £1.08bn of this (of those that disclosed these figures), ... ...distributed £17.2bn in dividends and... ...paid over £20bn in taxes (including, where disclosed, corporation tax, sales taxes, employer-paid payroll taxes and other taxes that constituted costs to the company). Tax is linked to wealth generation and distribution of profits but there is little focus in most annual reports in this context, including consideration of the total global tax borne by the company. But in terms of what these companies choose to report on, there is little information on broader contribution to society, and much continues to be positioned as Corporate Social Responsibility activities.
Profit supporting prosperity Financial profitability and the ability to generate net positive cash flows over time are fundamental to creating prosperity. Users therefore need to have sufficient information to obtain a complete understanding of judgements and estimates used in reporting on financial outcomes. This includes insight into uncertainty that may be driven by both internal and external factors (with COVID-19, Brexit and the impact of climate change being at the fore for many companies this year). ‘Judgements and Estimates’ remains the most frequently raised topic by the Financial Reporting Council (FRC), for the last three years, in their review of annual reports. While they have noted improvements in this area, they continue to note that companies are not identifying all material judgements and estimates or providing enough information to enable users to understand the level of uncertainty in estimates, as required by IAS 1. 90% of companies had identified key sources of estimation uncertainty aside from those relating to goodwill, indefinite life intangibles and defined benefit pensions (which have specific sensitivity disclosure requirements under other standards). Of these... 62% quantified the relevant assumptions or inputs used for some or all of those estimates 71% provided ranges or sensitivities indicating the impact that reasonably possible changes in estimates would have on carrying amounts for some or all of the estimates identified 20% provided neither of these things Certain estimates naturally lend themselves to sensitivities and quantification of assumptions, such as expected credit losses on financial assets and impairment of property, plant and equipment. For other estimates, such as those relating to tax and litigation provisions, such additional information is more difficult to provide. Despite this, there is still clear scope for improvement in this area and preparers should seek to ensure sufficient information is provided to understand the material judgements and estimates and the level of uncertainty in the estimate. COVID-19 brought significant uncertainty to all businesses and many governments set up schemes to provide assistance and reliefs for businesses. Half of those companies we surveyed took advantage of government funding, taking £1.7bn overall (of those companies that quantified this). £1.1bn was disclosed as being repaid. The presentation of profit by management can also be a contentious issue, with the use of Alternative Performance Measures (APMs) or non-GAAP measures on the face of the income statement remaining commonplace among UK reporters. 72% (2020: 78%) presented adjusted measures of profitability on the face of their income statement. APMs often reflect those measures used by management internally, supplementing the information in the financial statements, although their presentation in the financial statements themselves can be misleading and hence they are a continued area of focus by the FRC. The use of an additional column in the income statement remains the most popular way to present non-GAAP measures. The IASB’s draft amendments of the new IFRS Standard General Presentation and Disclosures introduce the term “management performance measures” (MPMs). MPMs are broadly defined as subtotals of income and expenses that communicate management’s view of an aspect of an entity’s financial performance, but which are not defined by IFRSs. The current proposal would prohibit the use of columns on the face of the income statement and the presentation of MPMs, in particular on the face of the income statement, would be restricted. For more information on the IASB’s draft amendments, see Deloitte’s IFRS in Focus. How are non-GAAP measures presented on the face of income statement?
Capital allocation - distributions In times of such uncertainty, the impact on distributions to shareholders has been significant. Indeed, 80% of companies discussed whether COVID-19 had had an impact on their dividends during the year (see Pandemic). However, a focus on this area is not new. Investors have been calling for more insight and transparency around dividend policy for several years, with some wanting to see an audited figure for distributable reserves within the annual report. In particular, the Investment Association has recommended that listed companies include their distribution policy within their annual report. For the future, the BEIS White Paper: ‘Restoring trust in audit and corporate governance’ (the White Paper) proposes stronger disclosure requirements on distributable reserves, suggesting either disclosing the total amount of distributable reserves or the ‘known’ distributable reserve, which must be greater than any proposed dividend. “The legal framework is well established, but high profile examples of companies paying out significant dividends shortly before profit warnings and, in some cases, insolvency, have raised questions about its robustness and the extent to which the dividend and capital maintenance rules are being respected and enforced.” the White Paper In this context, it was disappointing to find that 48% of companies (2020: 44%) did not clearly indicate the level of distributable reserves available. There is still work to be done by companies to meet investor expectations in this area. While 76% (2020:72%) of companies disclosed or described a dividend policy, nearly a third of these described their policy as a ‘progressive dividend policy’ or similar. Although concise, it does not provide much, if any, insight into the policy. The more detailed dividend policies included a percentage pay ratio based on earnings or a narrative explanation for how the dividend would be determined. Is the level of distributable profits disclosed?
Capital allocation – broader stakeholders The allocation of capital beyond distributions is a key aspect in achieving a company’s strategic outcomes aligned to its own purpose. Decisions on capital allocation should reflect management and the board’s priorities and demonstrate consideration of broader ESG factors that will ultimately affect the creation of prosperity. A description of the capital allocation policy and how it relates to the delivery of strategic priorities are important disclosures, providing evidence of purpose in action (see Purpose). As a result, there is an increased focus from investors, regulators and governments on capital allocation, requiring more transparent disclosure. Overall, it was disappointing that insights into capital allocation did not reflect the urgent issues that companies have confronted during the pandemic. For example, we observed that over 50% of companies have responded to the urgency of the need to respond to climate issues by either incorporating them in their strategy or by bringing forward deadlines for achieving their climate targets. However, this urgency and focus were not reflected in the capital allocation discussions, with only three companies discussing the allocation of capital to environmental matters and only 12 companies describing how they create value for the environment. Although not a statutory disclosure, only 36% of companies presented or described a capital allocation framework. These generally focused on re-investment in the business, maintaining a ‘healthy’ balance sheet and paying dividends. There was little or no explicit reference to broader ESG factors (such as investment in employees), despite it being a straightforward way in which to demonstrate their integrated thinking. Anglo American plc Integrated Annual Report 2020 Anglo American plc explained their value-focused approach to capital discipline, which prioritises sustaining capital to maintain asset integrity and paying a base dividend to shareholders, whilst ensuring a strong balance sheet. Any discretionary capital is then allocated to growth investments or upgrades to the portfolio with any excess returned to shareholders. Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2020/21 Wm Morrison Supermarkets PLC outlined their capital allocation framework in a table and quantified the various aspects of it in the accompanying pages. Despite most companies not presenting a clear capital allocation framework, it was good to see 80% (2020: 74%) providing an insight into how they allocate capital. We were looking here for specific discussion of how capital is allocated, rather than passing references to ‘investing in people’ or ‘investing in IT’ without quantification or an in-depth discussion. These discussions included references to how capital had been allocated in the year and also how it might be allocated in the future. Ideally, disclosures should address matters such as how decisions regarding capital allocation are consistent with the company’s purpose and the narrative on broader enterprise value creation (see below). Bringing these disclosures together in one place in the annual report can help present a fuller and more connected picture. The number of companies disclosing capital allocated to capital expenditure has increased from the prior year, with a notable emphasis on investment in technology or digital solutions. Some companies explained that an element of their capital expenditure was due to conditions created by the pandemic which resulted in an accelerated shift to digital channels and online solutions. Capital allocated to employees related to a variety of matters including investment in training programmes, bonus payments or payments made in relation to the pandemic, and material payments to employee pension schemes. The “other” matters noted in the graph mainly referred to acquisitions. Based on our understanding of each company from reading its purpose statement, business model and strategy, we considered that 30% (2020: 32%) of companies providing an insight into capital allocation had covered all material or the most significant stakeholders. For the remaining 70% (2020: 68%) we observed omissions of certain stakeholders which implied a narrower focus that was inconsistent with the company’s stated purpose, business model and strategy. Employees were frequently absent from capital allocation discussions, with only nine companies discussing capital allocated to employees, despite 66% of companies identifying employees as an input or key resource in the business model (see People). 78% quantified some or all of the capital allocation in their disclosures, an improvement from last year where only half the companies did so. These tended to be in relation to dividends, investments and capital expenditure. The FRC Guidance on the Strategic Report encourages a quantified analysis of allocations of free cash flow as it enables readers to understand how discretionary resources have been allocated between shareholders, other stakeholders and retained in the company. Within the capital allocation discussion, which stakeholders or matters were referred to?
Alignment of remuneration to prosperity Nearly 20% of revenue generated by companies in our survey was allocated to employee costs. This includes remuneration earned by directors – an ever-increasing area of scrutiny, particularly in relation to the agenda of creating prosperity more widely. There is growing investor expectation of alignment of company purpose, strategy and KPIs to performance management and incentives at executive director level. We sought to understand the extent to which performance management and incentives included ESG factors, given these factors are material to value creation over time and often referenced in commitments, strategic priorities and KPIs. We looked at the most recent remuneration policy disclosed in the annual report, even if it was not yet approved. The connection between remuneration and broader company strategy, particularly the consideration of broader ESG matters, was not always clear. It was pleasing to see that of the 39 companies who had employee-related KPIs, 28 had employee-related measures linked to directors’ remuneration. Similarly, of the 23 companies with a climate-related KPI, 16 had environmental measures linked to directors’ remuneration. Are there any elements of the directors' remuneration report relating to performance of broader ESG factors? Encouragingly, 80% (2020: 76%) of companies had clearly incorporated ESG factors to some degree into the latest remuneration policy. Of these companies including ESG factors: provided broad themes, such as improving health and safety measures, delivering on the diversity and inclusion strategy and reduction in greenhouse gases without specific measures cited. Many companies acknowledged that, due to the commercial sensitivity of the performance targets, broad themes were provided instead, and that the targets would be published retrospectively next year. provided quantified targets for some or all of the measures, such as a % reduction in greenhouse gas emissions or % of women in senior leadership roles. Disappointingly, the remuneration targets clearly corresponded to metrics noted elsewhere in the annual report for only 7 of these 11 companies. Of the 40 companies (2020: 38) incorporating broader ESG factors into directors’ remuneration: included employee-related factors (commonly health and safety, engagement or diversity) included environmental matters included other matters (largely relating to customer-related metrics) Environmental matters often focused on reducing greenhouse gas emissions and improving the environmental impact of operations. The increase from the prior year indicates that directors are taking greater responsibility to improve the company’s impact on the environment (see Planet). Despite this, linkage between detailed remuneration targets and broader company strategy across all ESG matters was disappointingly limited. The proportion of directors’ remuneration dependent on these broader ESG performance metrics varied considerably from company to company, as may be expected, with the range of specific elements of reward at risk ranging from 5% to 50%. Clear and transparent disclosure in this area is critical to demonstrate how directors are remunerated in line with broader company strategy, consistent with company KPIs and other stated commitments. Sufficient clarity around the value of remuneration at risk is also key. Disclosing quantified targets, rather than broad bands for strategic objectives or projects, provides this transparency. Croda International Plc Annual Report and Accounts 2020 Croda International Plc explained clearly how its directors’ remuneration strategy links to its business strategy. The metrics used in its PSP to measure ESG impacts are also KPIs used to monitor performance against group strategy; specific targets for each metric are disclosed. HSBC Holdings plc Annual Report and Accounts 2020 HSBC Holdings plc disclosed clear targets set in relation to one of its long-term incentive schemes, having clearly articulated in the strategic report the link between these measures and the group’s climate ambition. Centrica plc Annual Report and Accounts 2020 Centrica plc utilised its non-financial KPIs as metrics for part of their long-term incentive plan.
Value created for stakeholders In order to understand the prosperity of a company, it should be clear who value is being created for and what that value is in the eyes of the company. Value creation for stakeholders is linked to wealth generation. However, discussion on this topic in annual reports as a core part of the business varied. 88% of all companies articulated value creation for stakeholders in their business model. Is value creation discussed in the business model for the following stakeholders? Value tended to be defined as charitable donations or the provision of local jobs. The more insightful of descriptions here were those which demonstrated their purpose-driven contribution to society, such as: Anglo American plc’s purpose of “re-imagining mining to improve people’s lives” linking to creating value through enterprise development programmes in the local community; and AstraZeneca plc’s purpose of “We push the boundaries of science to deliver lifechanging medicines” linking to creating value through improving access to healthcare and developing local communities in which they work through partnering. Those reporters quantifying value creation for stakeholders in their business model remain in a minority. Quantifying value creation for stakeholders and linking these to KPIs is important to be able to understand the economic value created by the company. Where a narrative description alone was given to describe value created, these tended to be a generalised description. Surprisingly even in relation to investors, where value creation is generally in the form of financial returns, a narrative description was still more prevalent.
Prosperity and integrated thinking 84% of companies chose to report on their philanthropic efforts, although these rarely demonstrated a clear link to their strategy (such as part of social value creation). The link to strategy is important as it outlines the plan to create value for investors, customers and other stakeholders and demonstrates how business strategically creates social value. 38% of companies presented one fully integrated strategy incorporating broader stakeholders, rather than a separate sustainability strategy addressing corporate social responsibility. A strategy which incorporates the needs of broader stakeholders and outcomes for them reflects the underlying integrated thinking of management and the board, recognising the many value drivers that feed into success of the business and prosperity more widely. The lack of integration demonstrated by those companies failing to consider these broader stakeholders in their ‘main’ strategy is a missed opportunity to show how the board and management embed considerations of prosperity more widely into their purpose and strategy. Persimmon Plc’s Annual Report 2020 demonstrates how their strategy delivers on their purpose by focusing on six core focus areas. These six focus areas incorporate a range of stakeholders from customers, suppliers and investors, through to communities, the environment and employees. Are any stakeholders, other than shareholders and customers, recognised in the 'main' strategy, or are they recognised in a separate Sustainability-type strategy?
Prosperity and resilience Value creation and positive cash flows must be sustainable over time for a company to be prosperous – generating value for itself, its stakeholders and society more widely. Companies cannot be successful in a failing society, but it is equally true that failing companies impact the ability for society to prosper. It is therefore essential to understand how the business model leads to the generation of sustainable value. Therefore readers of the annual report are interested in understanding the future prospects and the resilience of a company and its activities, coupled with an understanding and analysis of what has already taken place. Disclosures on resilience and the viability statement are also important in this regard. The FRC expects annual reports to explain clearly how the board has evaluated and concluded on going concern and viability, describing the methods, judgements and assumptions underlying the assessments. The White Paper also recommends that the board should disclose a resilience statement that incorporates, enhances and builds on the going concern and viability statements. The proposal is that the statement should address business resilience over the short term (1-2 years), medium term (5 years) and long term. 84% of companies (2020: 70%) incorporated some discussion of the resilience or sustainability of the business model in the annual report. These were located throughout the report including in the Chairman’s Statement and Chief Executive Officer’s statement. Resilience was considered from a number of angles, including predictability of cash flows, long term contracts, diversification of the business model and high barriers to market entry. Many companies discussed the resilience of the business model as a result of the unprecedented challenges and disruption due to the pandemic. Some of the most informative disclosures in this area explored the depth of the relationships with stakeholders in addition to shareholders, including suppliers, customers and employees, explaining how they supported each other through the challenging times. One company discussed how financial support was provided to suppliers, demonstrating how they are looking at resilience from a wider perspective. Beazley plc Annual report and accounts 2020 Beazley plc included a summary of resilience within the risk section of its report. The example highlights that the resilience of a company is broader than the financial profits it makes and incorporates discussion around the resilience of its employees, its supply chain, its systems and processes. We evaluated whether companies considered a number of significant topics that may affect their viability – COVID-19 and Brexit as major disruptive events, and climate change. Each of these would be captured under the proposals in the White Paper for reporting by all companies in the short- and medium-term sections of the resilience statement. Unsurprisingly, 84% of companies discussed the impact of COVID-19 in the viability statement. These generally related to how the company has remained viable given the impact of COVID-19 (i.e. liquidity and funding) or the impact on viability based on future scenario analysis. However, the majority of these did not provide significant insight. A few notable exceptions discussed in detail the potential impact of the pandemic and quantified that impact. To be useful to the reader, a viability statement should provide a sufficient level of detail explaining the impact of the issue and how the company plans to manage and mitigate the risk. Uncertainty around Brexit appears to be reducing, with only 54% (2020: 66%) of companies identifying Brexit as a principal risk (either as a standalone risk or within a broader principal risk) and 26% (2020: 40%) referring to Brexit in their viability statement. As the uncertainty around Brexit continues to reduce, it is expected that Brexit will be less prominent in the viability statement. Surprisingly, the impact of climate risk in the viability statement was discussed by only 16%, even though 50% of companies had highlighted climate change as a principal risk (either as a standalone risk or within a broader principal risk). Principal risks should be reflected in viability considerations and disclosures, given their potential to adversely impact the performance and prospects of a company; a recent FRC thematic review confirmed that it is helpful to make clear which of the principal risks pose the greatest threat to viability. In turn, consistency between the viability statement and other areas of the report is needed to ensure useful information is being provided. The expectation is that the implementation of TCFD disclosures should provide impetus to improve this in the coming years (see Planet). Is the impact of the following items discussed in the viability statement? Smith & Nephew plc Annual report 2020 Smith & Nephew plc provided detailed scenario analysis explaining the potential impact on the business with linkage to strategy and principal risks. IMI plc Annual Report & Accounts 2020 IMI plc also provided detailed scenario analysis, again with linkage to principal risks including one scenario citing a specific COVID-19 impact. NEXT plc Annual report and Accounts January 2021 NEXT plc included a discussion of viability over a 3 year period and also indicated how they manage the business over a range of time horizons. This visual diagram is helpful to demonstrate consistency of time horizons with the strategic cycle.
What to do: Explain clearly the future prospects and the resilience of your company and its activities. Describe how the board has evaluated and concluded on going concern and viability, describing the methods, judgements and assumptions underlying the analysis. Provide transparent disclosure as to how material aspects of company strategy are reflected in directors’ remuneration, including those relating to broader ESG matters, and how metrics used to determine remuneration outcomes are consistent with disclosed KPIs, commitments and company purpose. Make clear the proportion of remuneration at risk, including how it is allocated across short and long term schemes and how performance is assessed. What to watch out for: Consider the consistency of how key stakeholders are considered through all elements of disclosure (such as strategy and KPIs), including the description of value created for them in the business model. Providing insight into capital allocation priorities and decisions made in the period can aid demonstration of a purpose-driven business. Ensure disclosures cover all relevant areas of capital allocation, consistent with the stated purpose, commitments made and value creation for company and stakeholders over time. Provide detail around the dividend policy and disclose the level of reserves available for distribution. Investors want to see alignment of incentives to long-term success; therefore, embedding material ESG factors into directors’ remuneration helps this alignment. Consistency between commitments and KPIs for the company and those used to determine executive remuneration also helps demonstrate this alignment. Confirm that all material judgements and estimates have been identified and disclosed. Information, as required by IAS 1, should be provided to enable users to understand the level of uncertainty in the estimates.
Explore the report findings We have surveyed 50 companies with more than 500 employees from among the FTSE 350 and across industry groups, examining reporting trends in five areas: purpose, people, planet, prosperity, and of course a fifth "P" that has been greatly affecting business - the pandemic.
Purpose People Planet Prosperity Pandemic


Annual report insights 2021

80% of companies discussing dividends in the context of COVID-19 reduced, cancelled or suspended dividends
50% took advantage of government funding, with 44% quantifying the amount received
96% referred to consideration of employee wellbeing
64% discussed how they had maintained their customer relationships, but only 30% covered suppliers
Although 84% referred to COVID-19 in the longer-term viability statement, only 58% had clearly addressed the long-term resilience of the business model
Survival and resilience In the course of the last year, business focus has moved from the urgency of short-term survival to the development of longer-term resilience in the wake of COVID-19. Reports discussed a broad range of issues regarding the pandemic. In our opinion, just over half of disclosures (54%) addressed both immediate short-term survival and longer-term resilience of the business. A further 4% addressed longer-term resilience only, while a significant minority appeared to focus purely on the short-term survival of the company in their primary discussion of the effects of COVID-19. Yet despite the pandemic, no company in our sample disclosed a material uncertainty related to going concern. The Financial Reporting Council (FRC) has called out the discussion of the longer-term effects of COVID-19 on the strategy and business model as a key area of investor interest. Although 84% of companies referred to COVID-19 in their long-term viability statements, it was typically discussed in the context of scenario and/or sensitivity analyses, often at a fairly high level. Accordingly, in several cases we felt that there was insufficient detail given to gain a full understanding of the actual effect of COVID-19 on the long-term resilience of the business. Nearly a third of companies set out changes to their business model or strategy as a response to COVID-19. These frequently represented ways in which the company had adapted or was planning to adapt to new ways of working. Some companies talked about enhanced online services for customers and/or moving large portions of their business to “online only” in response to changes in the way that their customers wanted to access products and services. Others referenced the clarity that the COVID-19 pandemic had provided regarding underperforming businesses and explained that this realisation had prompted a resulting change in strategic focus. Croda Annual Report and Accounts 2020 Croda International plc discussed its short-term response and some aspects of longer-term resilience in its corporate governance statement. Travis Perkins Annual Report and Accounts 2020 Travis Perkins plc clearly identified COVID-19 as a driver of change in its customer behaviour and set out changes to its strategy in response. What was the focus of COVID-19 discussion? How did companies address the longer-term resilience of the business in response to COVID-19?
The role of the board The board plays a critical role in managing and responding to significant events such as COVID-19. Despite challenges around face-to-face meetings, many boards held additional virtual meetings to ensure appropriate oversight and monitoring of the company’s response. In just over half of cases, boards described the role of specific teams and committees in addition to actions taken by the board of directors. This helped to clarify the overall strategy and explain how board-level leadership cascaded down through the business. HSBC Holdings plc Annual Report and Accounts 2020 HSBC Holdings plc included a box in the corporate governance statement specifically calling out changes to Board governance to ensure an appropriate approach to dealing with COVID-19. IMI plc Annual Report & Accounts 2020 IMI plc explained early in the annual report how its board had established a COVID-19 response team and also set out how the board engaged with employees throughout the pandemic.
Mitigation – cash and dividends The FRC notes that disclosure of the availability of cash within a group of companies is of particular importance, including the ability to transfer such resources around the group to where they are needed, given operational, regulatory and legal constraints, and access to further cash through existing and potential financing facilities. In ensuring both short-term survival and considering longer-term solvency, many companies turned to measures designed to protect and/or increase available cash reserves. Commonly, this involved a change in dividend strategy, although some companies noted other measures such as reduced executive pay and reduced capital expenditure. 80% explained how they had considered the impact of COVID-19 on their dividends. Although the majority of companies discussing dividends in the context of COVID-19 explained that they had to cancel, suspend or reduce dividends, a significant minority found that they were able to reinstate dividends (and in some cases, even pay higher dividends than anticipated). Early decisions to conserve cash in responding to the significant initial uncertainty caused by COVID-19 may have played a role in those companies’ ability not only to survive the pandemic but to find and fund new ways of developing and enhancing the business model in the longer term. Interestingly, of those companies which were able to reinstate dividends, only three disclosed use of government support and two of these stated that they had repaid it in full. The better discussions around suspended, reduced or cancelled dividends included commentary on when the situation was likely to change. Of those who discussed the impact of COVID-19 on dividends, what was the outcome? HSBC Holdings plc Annual Report and Accounts 2020 HSBC Holdings plc described the considerations around the decision to cancel dividends, explained the reasoning and set out clearly when it expected dividends to resume. Pearson plc Annual Report 2021 Pearson plc, in its description of the board’s response to COVID-19, provided insight into considerations on whether to pay dividends as part of its wider strategy for dealing with the pandemic. This included consideration of the use of government support schemes, which it ultimately chose not to use.
Mitigation – government support The FRC expects companies to provide detailed disclosures about the use of government support schemes. Half of the companies in our sample disclosed that they had made use of some form of government support (whether in the form of loans or the use of furlough/the job retention scheme). Of those, the majority disclosed the monetary value of the support taken and just under half discussed how they planned to repay the amounts (including those which stated that they had already repaid). In a few instances, companies also discussed why they did not take advantage of the government support offered, but this was not common. Where this was discussed, it was typically in the context of considering whether the funds were genuinely needed, given the company’s financial position and performance in the year. To what extent did companies describe their use of government support? Howden Joinery Group Plc Annual Report and Accounts 2020 In its Chairman’s statement, Howdens Joinery Group plc stated the amount of government support it had received and in what form, and then explained that it had repaid all amounts in full in the latter part of the year.
Impact on employees COVID-19 had a significant impact on employees and a key part of the role of the board during the pandemic would therefore have been to ensure that employee concerns were considered and their needs addressed. It was good to see that all companies were discussing the impact of COVID-19 on employees to some extent. While most companies discussed issues such as wellbeing, remote working and additional health and safety measures in the workplace, just over half discussed how they had ensured preservation of jobs and fewer still talked about how they had looked at reskilling employees into alternative roles. 13 companies made forward-looking structural changes to the workforce following the pandemic, yet just five of those also discussed upskilling or reskilling of employees. Beyond acknowledging the workplace challenges of moving to remote working and increased health and safety considerations, companies can clearly demonstrate the importance of employees by talking about how they have supported their wellbeing throughout the pandemic. It was encouraging to see that all but two companies referred to employee wellbeing in the context of COVID-19. In several cases these disclosures tended to be quite high-level or ‘token’ in nature, with some comments limited to “offering appropriate advice and assistance”. The better disclosures provided true insight into how the board and senior management engaged with employees during the pandemic to understand their concerns and how that engagement led to positive change that met employee needs. This type of disclosure sits naturally within the context of the s172(1) statement (see Purpose). In which respects did companies discuss the impact of COVID-19 on employees? Avast plc annual report 2020 Avast plc described clearly the challenges faced by its employees during the pandemic, detailed actions taken to support them and also considered what their future workforce and working environment will look like in future. Provident Financial plc Annual Report and Financial Statements 2020 Provident Financial plc, in its s172(1) statement, set out detailed actions taken to engage with and support employees during COVID-19, highlighted significant feedback from employees and described steps taken to address that feedback.
Maintaining other key relationships As well as employees, we expected companies to outline the impact of the pandemic on relationships with other key stakeholders and, in the spirit of their directors’ s172 duty, set out how they have maintained those relationships. This was particularly true in the case of customers, although just over half also considered the effect of COVID-19 on their relationship with suppliers. Such discussions of stakeholder relationships often appeared in the s172(1) statement but several companies also included it elsewhere in the annual report, including in any COVID-19 focused discussion. In the context of customers, maintenance of relationships typically involved increased engagement to understand customer needs during the pandemic and adjustment of the way in which goods or services were provided to those customers as a result. For example, businesses in the retail sector introduced partnerships with delivery companies and “click and collect” options to enable customers to receive products contactlessly. Others invested in strategic initiatives such as increasing online presence and developing methods to make it easier for customers to engage virtually rather than in person. Where companies discussed the supplier relationship, they often talked about how they paid suppliers more quickly or how they worked with their supply chain to minimise disruption and ensure arrangements were COVID-secure. How did companies discuss the impact of COVID-19 on key stakeholders? Travis Perkins plc Annual Report and Accounts 2020 Travis Perkins plc explained how COVID-19 had accelerated the development of its strategic initiatives to better serve customers. The Unite Group PLC Annual Report & Accounts 2020 Unite Group plc, whose main customers are students, considered student welfare as well as their financial needs and engaged regularly with students to ensure their needs were being met. This was reinforced by discussion of key decisions made by the board in the year in the s172(1) statement.
Presentation / overall approach The approach to how COVID-19 was discussed varied significantly. Frequently, companies presented a focused section or double-page spread which drew together all their COVID-19 considerations, often cross-referring out to other areas where COVID-19 was discussed. Others addressed COVID-19 throughout the annual report, sometimes using coloured boxes or icons to identify COVID-19 specific impacts on the disclosure at hand. Taken as a whole, we considered that in 88% of cases, the financial statements reflected the disclosures made in the narrative reporting on COVID-19 in a consistent manner. This was encouraging to see, in line with the FRC’s continued focus on ensuring a connected, cohesive story told consistently throughout the annual report. Informa plc Annual Report and Accounts 2020 Informa plc set out its COVID-19 action plan early in the annual report, explaining the effect on areas of the business and quantifying its response to the challenges presented. Persimmon Plc Annual Report 2020 Persimmon plc used green call-out boxes to set out the additional effects of COVID-19 on various stakeholder groups.
Impact on financial statements The FRC has highlighted a number of areas where clear disclosure around the impact of COVID-19 is important. These include APMs, the presentation of “exceptional” (or similarly described, including “adjusting”) items related to COVID-19 in the income statement and the effect on significant judgements and key sources of estimation uncertainty in the financial statements. Of the 84% that disclosed an APM policy, none of these indicated that their policy had changed as a result of COVID-19. A significant minority of companies described COVID-19 related items as “exceptional” or used other similar terminology such as “adjusting” or “non-recurring” under their existing policy. These items tended to relate to restructuring costs and increased provisions or impairments (including impairment of leased assets). However, this was not always consistent across the annual report, with some companies describing items as “exceptional” or similar in the narrative reporting or financial statements only, rather than in both places. In contrast, just over half discussed COVID-19 in the context of critical judgements and/or sources of estimation uncertainty. 40% noted that COVID-19 had affected these, while 14% explicitly concluded that it had no impact. Unsurprisingly, the affected areas were typically the calculation of impairment (including expected credit losses) and provisions. More information on accounting considerations in light of the pandemic can be found in Need to Know - Accounting considerations related to the coronavirus 2019 disease. Were COVID-19 related items described as "exceptional" or similar?
What to do: COVID-19 has served as a driver to accelerate purposeful business. Use this opportunity to describe the effects of and lessons learned during the pandemic on the business model, strategy and governance of the business and explain how these are being actioned. Explain the longer-term impacts of COVID-19 on the company’s capital allocation and cash management strategy. Consider how remuneration, capital allocation and dividend policies have been affected and reassess priorities for the future. Make clear how the company’s engagement with employees during the pandemic has helped the board to understand their concerns and needs and explain how those concerns have been taken into consideration in longer-term planning, including changes to working practices and enhancement of wellbeing initiatives. What to watch out for: Discussion of the impact of COVID-19 now needs to move towards consideration of the longer-term effects on the strategy, business model and viability of the business. In particular, discussion in the viability statement should be consistent with and supported by content elsewhere in the annual report. Consider how policies on cash management, capital allocation, executive remuneration and payment of dividends have changed as a result of COVID-19, particularly in situations where government support has been taken; there is significant social and investor interest in this area. Bring credibility and authenticity to disclosures about stakeholder engagement in the wake of COVID-19, particularly as regards employees, by discussing lessons learned and new approaches developed as a result of the pandemic and explaining how these will continue to be embedded in the business going forward. If COVID-19 related expenses are described as “exceptional” or similar, ensure that they are consistently described as such throughout the annual report and that they are genuinely exceptional in nature.
Explore the report findings We have surveyed 50 companies with more than 500 employees from among the FTSE 350 and across industry groups, examining reporting trends in five areas: purpose, people, planet, prosperity, and of course a fifth "P" that has been greatly affecting business - the pandemic.
Purpose People Planet Prosperity Pandemic